Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Your guide to the ANZ, Suncorp deal and capital raising
Australia and New Zealand Banking Group (ASX: ANZ) will become the third largest domestic home lender after acquiring the banking division of competitor Suncorp Group Ltd (ASX: SUN) for $4.9 billion.
To fund the deal, ANZ announced a $3.5 billion accelerated renounceable entitlement offer for institutional and retail shareholders (more on that below). Shares will remain in a trading halt until Thursday.
ANZ will welcome $47 billion of home loans, $45 billion in deposits and $11 billion of commercial loans to its existing lending portfolio.
Importantly, it increases the bank’s exposure to Queensland by 50 per cent. The sunshine state’s economy has grown faster than all other domestic competitors over the past two decades.
The deal adds 5.8 per cent to ANZ’s earnings, however on a per-share basis it will be earnings-neutral.
The sale price represents a price-to-earnings (P/E) of 13.8 or a price-to-net-tangible-assets (P/NTA) of 1.3, a meaningful premium to regional peers.
Bank Queensland (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN) trade on a P/E of 9.2 and 11.6 respectively.
ANZ expects it will extract annual cost synergies of $260 million, equal to 35 per cent of Suncorp’s current cost base. It will cost shareholders $680 million in integration expenses to realise the ambitious target.
Should it be successful, this would reduce the deal’s P/E to 9.3 and result in a low single-digit uplift in earnings.
With the sale of its banking operations, Suncorp will become a pure-play listed Australian insurer. After accounting for tax and divestment costs, the bank expects to return the majority net proceeds of $4.1 billion to shareholders. This represents approximately 28 per cent of Suncorp’s current market value.
The deal is the biggest banking acquisition since Westpac Banking Corporation (ASX: WBC) chewed up St.George in 2008.
Regulators will be vexed that one of the big four banks has the audacity to consolidate the industry further. While Suncorp will maintain its Queensland roots, it’s likely that over the longer term this gravitates towards ANZ’s head office in Melbourne.
To mitigate against potential regulatory issues, ANZ sweetened the deal with $35 billion of lending commitments in Queensland and no job losses for at least three years.
The deal is expected to close in the second half of 2023.
What are the shareholder options?
The capital raising is a 1-for-15 pro rata accelerated renounceable entitlement offer. This is finance lingo for all shareholders having the option to purchase new shares in proportion to their existing shareholding.
For example, if a shareholder owns 15,000 ANZ shares, they will be offered 1,000 entitlements.
Institutions will be able to take up entitlements and any leftover book-build before Thursday.
For retail shareholders, there are three options. Shareholders can choose to take up part or all of their entitlements before the retail offer closes on August 15.
Alternatively, the entitlements will trade publicly from Thursday until August 8. If the ANZ share price is above $18.90, then the entitlements will also proportionally increase in value.
Should it fall below that, the entitlements will be worth nothing, given investors could buy ANZ shares on market for a lower price.
Finally, shareholders can elect to do nothing and let their entitlements be offered for sale during the retail shortfall book build. Any excess proceeds above $18.90 will be paid to the shareholder.
Questionable capital allocation
Shareholders will rightly question why ANZ is going cap-in-hand just four months after completing a $1.5 billion buyback at an average share price of $27.71.
The $18.90 offer price might be a 12.7 per cent discount from the last closing price, but it’s also a 32 per cent fall from where the buyback took place.
One positive is that the agreement with Suncorp means ANZ has extinguished discussions with KKR about the acquisition of accounting software company MYOB. Commentators had questioned the rationale behind such a transaction and the mooted $4.5 billion price tag – nearly twice what KKR paid for it in 2019. Sticking to its knitting by acquiring the banking operations of a competitor will be much easier for investors to digest.
Nonetheless, it’s only a small reprieve for shareholders who are being asked to tip cash into a deal that won’t improve near-term earnings. Furthermore, the $680 million in extra costs is no spare change in addition to the executive mindshare dedicated to integrating an entirely new bank.
In recent times ANZ has lagged big four peers in processing times and technology. Adding a sub-scale operation with legacy systems will only exacerbate that issue.
Fortunately, the bank looks to be getting itself back into shape. A trading update released on the same day revealed revenue increased 5 per cent in the third quarter and its net interest margin expanded by 3 basis points. Process times are not back in line with the other majors.
The jury is out as to whether ANZ can extract the required synergies to make the deal earnings accretive. Unfortunately, the decision won’t be known for some years.
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